Using 2nd home equity to construct additional units

[Courtney S.]

We have a multi-family property that we are exploring adding several additional units to. I also have a vacation home that I own outright. It seems the best option for managing the cash outlay for the construction of the additional units would be to take a cash out loan on the 2nd home, locking in an interest rate that should be lower (either a 15year or a 5yr ARM). I would not get any benefit from deducting interest on a mortgage on the 2nd home loan due to the $750K cap. If I use the proceeds for the construction of the additional units, would I be able to deduct that interest expense as a rental expense? I believe I would have to capitalize the interest incurred during the construction period but then after that wondering if I could deduct it. I've read a few IRS publications on this and didn't find an obvious answer.